Tracking and forecasting pay rewards from 1998 to 2038

Unemployment is at a forty-year low so why isn’t this being reflected in pay review figures? To mark our twentieth anniversary, we discuss the pay review trends over the last twenty years and look ahead to what the next twenty years may hold, particularly how the push for equality is setting the tone in the world of reward.

Twenty years ago, pay reviews could feasibly be between five and six per cent. We consistently saw this level of pay increase in industries where there was a shortage of skills and talent. Since the recession hit in 2008, pay review levels have not recovered to pre-crisis levels, staying around the two to three per cent mark.

Market commentators have expected pay growth to pick up the pace throughout this period, but it has remained steady. There are signs that this increase is on the horizon, with 2018 pay reviews having seen a rise, but the uncertainty of Brexit and trade tariffs are factors that may once again hold back any real acceleration of wage growth in the near future.

Declining wage growth has dominated the last twenty years

Our UK Reward Management Surveys have captured pay trends since 2009 and show that whilst wage freezes were a popular way of weathering the 2008 crisis, almost no one is freezing pay in 2018. The median for 2017 had remained consistent since 2015 at two per cent, whilst early analysis sees the median pay increase for 2018 is up to three per cent.

Director of Paydata Tim Kellett says, “In the aftermath of the 1973 recession, the recovery was relatively quick in comparison: a real bust and boom. The latest recession was characterised by caution which has stayed for the long-term. People avoided mass redundancies where they could, particularly House Builders who tried to move people around the business, holding on to their key skills, whilst the Construction industry moved employees internationally to try to stem their turnover and weather the storm. They battened down the hatches. This creative approach to get through the recession has meant that low level wage increases have remained. It really has been a bumpy road to recovery since the recession that continues to set a cautious tone amongst businesses.”

The link between seniority and pay increases

Immediately after the recession, some organisations froze the pay of their senior executives, particularly those who earned over the threshold of £80,000 until the business outlook became more optimistic. This enabled two per cent to still be awarded to the rest of the business to protect morale whilst the economic crisis played out. However, over the past two years, executive pay resumed its acceleration.

Paydata’s pay database captures the salaries for different roles based on defined levels of seniority. Top level senior management and executives have seen a pay rise equivalent to 46% since 2006 whilst the more junior bands of roles have seen more incremental increases, such as operations and support roles which have seen a pay rise equivalent to 10% since 2006. There is a huge disparity between the experience of top and bottom earners, with the gap widening.

The acceleration of executive pay 

With wage inflation remaining pretty flat for most employees, executive pay is something that can start to grate when the ratio has increased by 174% over the last twenty years. The 2016 pay ratio of 129:1 was estimated to be 47:1 in 1998. Compulsory publication of executive pay ratios is now on the table, which will introduce greater accountability. Although this does not guarantee that this will reign in the acceleration, it is a tool that has promoted useful dialogue in the context of gender pay, bringing employer practices into sharp focus.

Looking ahead: the next twenty years 

Over the last few years we have seen a rise of out of cycle pay awards which risk undermining the overall mechanism of looking at pay reviews as a whole. Two-thirds of companies have granted these, with more than half citing market pressures. Employers’ reluctance to officially grant an across the board three per cent increase to match inflation has potentially burdened some with the costlier option of negotiating pay awards to address market pressures affecting their employees. Out of cycle salary increases carry the additional organisational costs of managing and administering these, which risks escalating the true cost of pay awards to employers over the year. This development of incremental tweaks is one to watch.

Loyalty no longer equates to increased pay packets. Early analysis shows that two thirds of respondents to our UK Reward Management survey said that they had to offer new recruits up to 10 per cent more than incumbents. Workplaces already have to engage up to six or seven generations of workers – with baby boomers who value benefits such as pensions and medical insurance to millennials who are driven by values, purpose and making a difference. Existing generations have 10 to 15 years in between them. Next generations are being created in even shorter time frames of around five years. Each generation is characterised by different sets of values, bringing their own engagement challenges to the future workplace.

With gender pay reporting underway and proposed measures to scrutinise executive pay, the push to promote an ethical approach to pay is gaining momentum. Monitoring both who employers are focusing their reward on and what the drivers are such as high performance, greatest contribution and the external and internal market, are key to an organisation’s ability to create equal opportunities for current and prospective employees. Fair and transparent pay will dominate the framework for setting pay increases over the next twenty years.